China’s New President Sets Up a Potential Showdown, With Himself

Police officers outside the People’s Bank of China, the country’s central bank, in Beijing. The bank eased up on a cash squeeze Friday, a day after interest and interbank lending rates soared.Credit
Ng Han Guan/Associated Press

The turbulence that struck China’s banks this week is the latest episode in a political drama likely to play out in coming months: President Xi versus President Xi.

The country’s new leader, Xi Jinping, has ignited expectations of bold economic liberalization, but he has also cast himself as a resolute defender of Communist Party control, leaving even insiders uncertain about how far he will push changes that could strain the webs of state patronage and unsettle the stability that he and many other officials also prize.

The changes proposed by some Chinese officials include rolling back certain state controls on prices of energy and natural resources, encouraging private business in industries long dominated by state conglomerates and bringing more market competition into the financial sector.

But such ambitions could falter in the face of opposition from other officials and state-owned companies, as well as the concerns of party leaders about social instability and slowing growth. The turmoil of bank-to-bank loans is but one example of the kind of economic jitters and pitfalls that Mr. Xi and his colleagues could confront as they grapple with these policy choices, analysts said.

“So much risk has already been accumulated, but they need to avoid panic while pushing forward real reforms,” said Tao Ran, an economics professor and director of the China Center for Public Economics and Governance at Renmin University in Beijing. “It’s politically very difficult.”

The interest rates that banks charge to lend to each other shot up Thursday and lending between banks nearly seized up after the People’s Bank of China uncharacteristically failed to intervene to relieve a cash squeeze. The move seemed to be part of the government’s effort to force state banks to cut lending to inefficient or risk-laden programs favored by local officials and politically connected investors, many of them state-owned companies.

On Friday, the People’s Bank of China appeared to retreat a bit from its hard-line stance, and financial industry executives said the central bank was releasing more money for lenders, calming investors whose worries about China’s growth had rippled across stock markets. Bank-to-bank rates climbed down from Thursday’s record highs, but the situation remained volatile.

“I thought that was a show of policy makers’ determination,” Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong, said of the cash crunch. “They want to impose some near-term pain for long-term benefits. What they are doing is preparing steps for liberalization and, hopefully, for better market discipline.”

In China, the Communist Party’s power rests on a marriage of political and economic control, but Prime Minister Li Keqiang and other officials have said market liberalization is needed to foster new sources of growth.

Yet those changes could require painful, even risky, surgery on the party’s limbs of power: state-owned banks, local governments, and companies and investment vehicles controlled by the government. And that is the conundrum facing China’s leaders: they want to maintain the growth needed to satisfy an increasingly prosperous and vociferous society, yet worry that the proposed changes could erode the political reach and stability they see as underpinning one-party rule.

“Economic reform, I mean real reform, undoubtedly now involves questions about the political system, because excessive state power is a key issue,” said Deng Yuwen, who was dismissed this year as an editor at a party newspaper, The Study Times, after bluntly criticizing state policies.

Mr. Xi, as party leader, must come up with at least part of his answer to these questions by autumn, when the party’s Central Committee gathers. With slightly more than 200 senior officials as full, voting members, the committee meets in seclusion at least once a year to approve policy priorities. This meeting, or plenum, is the third for this cohort of the committee — by custom, third plenums set the direction for economic policy — and Mr. Xi and other officials have indicated that they want this gathering to unveil major changes.

Photo

President Xi Jinping of ChinaCredit
Victor Ruiz Garcia/Reuters

“The plenum is going to be a watershed one way or another,” said Christopher K. Johnson, a China expert at the Center for Strategic and International Studies in Washington. “Either because of what it says about the direction of reform or about the degree of stagnation in the party.”

The most famous third plenum, in 1978, is portrayed by the party as the start of Deng Xiaoping’s transformative era. Mr. Xi appears to hope that the next plenum will give him some of Mr. Deng’s aura. He has assigned Liu He, an adviser who advocates faster steps toward a market economy, to prepare for the meeting, said a Chinese businessman close to several leaders. He spoke on condition of anonymity to protect his access to officials.

Mr. Xi told President Obama in California this month that he was determined to remold the Chinese economy. “We must deepen reforms to promote healthy and sustained economic development,” Mr. Xi told Mr. Obama, according to Xinhua, the state-run news agency.

Mr. Liu is overseeing teams of officials and researchers developing proposals that may be endorsed at the Central Committee meeting later this year. According to the Chinese businessman who requested anonymity, those proposals include gradually freeing bank interest rates from state controls; lifting barriers preventing rural residents from being officially absorbed into cities; allowing private companies to invest in some sectors until now controlled by state companies; and giving competition a bigger role in setting prices for natural resources and energy.

“These may not be the final programs to be implemented, but these are organized by the government, so that at least shows to me that they’re serious and determined to make changes,” said Mr. Huang, the Barclays economist, who has also described the proposed changes.

Mr. Liu’s roles include running the office of an elite party group that steers economic policy. Now 61, he studied at Seton Hall University for a year and graduated from the John F. Kennedy School of Government at Harvard with a master’s in public administration in 1995.

“I think there’s no question: Liu He is clearly pro-market,” said Barry J. Naughton, a professor at the University of California in San Diego who studies Chinese economic policy.

Yet the Chinese government’s economic agenda is rife with tensions about the pace, focus and sequence of possible changes. “People may shout the same slogans, but there’s a lot of controversy over just what needs reforming,” said Hua Sheng, an economist at Southeast University, in Nanjing, China, who has been a prominent voice in policy debates.

Senior officials have put off considering at the coming plenum how to deal with state-owned corporations, which dominate swaths of the economy — often inefficiently, sometimes corruptly — according to the Chinese businessman close to senior officials.

“They have become a very powerful group, and many of the senior managers are senior party officials themselves,” said Mr. Huang, the economist, speaking of state-owned enterprises, known as SOEs. “We’re not going to see outright privatization of SOEs any time soon, but that’s to be expected.”

China’s previous leader, Hu Jintao, vowed economic changes at a Central Committee meeting a decade ago, but he squandered chances to act on those vows, many economists and, in private, quite a few officials say. If Mr. Xi does the same, the risks will be worse, analysts said. The room for easy growth in China is tapering off as the population of cheap labor ages and shrinks, and land and natural resources become costlier.

But another fear is that the government could act too hastily, removing state controls on the financial system before more market-driven growth has time to kick in, said Professor Tao of Renmin University. Rash moves in the finance sector could expose and exacerbate the debt-related problems of state-run companies and local governments, he said.

“If financial reforms are started first without real sectoral reforms, then you don’t get new sources of growth, and you could make asset bubbles even worse,” Professor Tao said. “This system is already fragile.”

Neil Gough contributed reporting.

A version of this article appears in print on June 22, 2013, on page A4 of the New York edition with the headline: China’s New President Sets Up a Potential Showdown, With Himself. Order Reprints|Today's Paper|Subscribe